There are many Federal legislation and principles to govern the offering of financial products and services, which normally aim to regulate these financial items under one licensing regime (Corporations Act Part 7.2). This legal and regulatory regime establishes many policies and standards for financial service providers with the purpose of increasing the compliance level and competency within the industry. Any market operator is required to own a licence from the Minister to undertake operations in a financial product and service market. It is just this licensing regime that regulates market operators to comply with its obligations in the financial market. This paper briefly outlines some distinguishing considerations about such regime. Having a look at the information of this regime, people will get clear how the Minister and ASIC govern operators, as well as the underlying philosophy of this regime.
The current three tiered regulatory framework in financial market
The current regulatory framework in financial market is effectively three-tiered. The legislation sits at the top, parliament sits in the middle and the final tier is standards. The legislation is conducted based on Principles, while ASIC Policy and Guidance is based on the legislation and Principles. As well, appropriate codes of practice and standards are devised on the account of prescriptive legislation and guidance, for the sake of suiting different industries’ conditions. The three tiers have four general objectives, which are licencing, disclosure, competency and knowing financial consumers (Johnston, 2002). In detail, the main reasons that why financial market should be regulated are protecting market users and enhancing market integrity and financial system stability (ASIC, 2002). As well, both financial operators and consumers anticipate the safety of institutions and overall financials system by regulating the whole financial market.
The main method that the Minister and ASIC adopt to achieve above goals is by requiring market operators to be licensed and to follow the licensee obligations. As a result, the regulatory outcomes of different markets are achieved under the uniformed market regulation. However, the regulatory regime is very flexible, since the regulatory outcomes and compliances should consider the features of the market, such as the market structure and market size. The Minister and ASIC’s three main functions in financial markets regulating are following (Plessis & Hargovan &Bagaric, 2011):
- Enforcingcompany and financial services laws to protect customers;
- Assessing and enforcing licensees’compliance with their obligations;
- Holding out the operator who does not own a licence or an exemption.
Financial product and financial services
It is imperative for the regulator to clearly define what are financial product and financial services. Under the legislation, a financial product will be considered to be the majority of what financial service industry sells, from genuine services to investment securities. In addition, as Macmillan (2003) illustrated, ‘financial service is defined broadly and includes the provision of financial product, operating a registered scheme or providing a custodial or depository service’. Under the legislation, the person who provides financial service is considered to (1) deal in a financial product; (2) provide financial product advices; (3) develop market for financial products; (4) operate an investment scheme, or (5) provide depository services.
Uniform licensing scheme
The most significant development of financial market regulation is the establishment of the uniform licensing scheme. The regulatory framework has already established based on one single ‘principles based’ approach to authorization of financial product markets in the FSI Report. It creates a single licensing and disclosure regime for the financial services industry, which includes advisers, markets, products suppliers, licensees and other financial service providers. The licensing scheme became uniformed when three new licences were introduced in this regime: Australian market licence (s795B), Australian clearing and settlement (CS) facility licence (s913B), and Australian financial services licence (s824B). A person who operates a financial business in Australia should own an Australian market licence.
Under section 913B, Australian financial services licence can authorize a person to provide financial services. A person should own an Australian market licence unless the financial market is an exempt market. Separate authorization is necessary in existing regulatory regime for the sake of trading insecurities and futures contracts. As well, Australian market licence allows a person to operate a financial market under section 795B. Every person, who operates a facility, should own a financial product market licence in markets where regularly make or accept buying, selling or exchanging financial products or services, or regularly expect or intend to buy, sell or exchange financial products or services. The third licence is Australian clearing and settlement (CS) facility licence under section 824B. If some markets do not operate their own clearing and settlement facilities, this separate licence, is introduced to authorize the operator with the power to operate a clearing and settlement facility. The licence is still needed even if the service is provided to a wholesale or a retailer, because a licence can authorize others on the licensee’s behalf.
Because of the uniform licencing scheme in the financial market regulation, every operator should obey some obligations which restrict their financial behaviors. Infringing the obligations will lead to the revoking of licences. A market licensee has to take responsible to ensure the fairness, ordering and transparency of the market. The regulators aim to look after consumers by requiring operators to own adequate arrangements for supervising the market and comply with the licence conditions and financial services laws (Johnston, 2002). As well, it is obligated for licensees to maintain competency to provide the required supervisory and compensation arrangements. It is imperative for them to ensure a complying dispute resolution system about retail clients’ services. Moreover, in order to maintain the market development, licensees should ensure no unacceptable control situation in the corporate and no disqualified individual existed in the licensee.
What’s more, ASIC requires market licensees to obey some additional co-regulatory obligations in its Market Supervision. Licensees must give written notice to ASIC and assist ASIC to access market facilities. As well, they must provide ASIC with listed disclosing entity information (s792C), such as annual report, so that ASIC will get clear about its financial operating conditions. Actually, ASIC indeed own the power to assess licensee’s compliance for the sake of protecting dealings in financial products and ensuring fair and effective provision of services. As the top regulator in the financial market, the minister has the power to give directions to licensees and to require the licensees’ special report.
The exemption of market licences
Any operator must own an Australian market licence except the ones who operate in financial market that the Minister has exempted in part 7.2. The legal and regulatory regime also defines who may exempt from getting an Australian financial services licence. If the Minister has exempted the financial market from the operation, the operator will not need to own an Australian market licence. Operators can apply to ASIC for exempting a particular financial market if they fully describe the operation of the market and the reasons why it should be exempted. It will take four weeks for the Minister to response for the proposed application. Normally ASIC will advise the Minister to exempt a market if no public benefit existing in governing the market. Actually, the trading volume and the nature of trading products will also be highly considered. However, there may be some difficulties to identify which ones are eligible for the licences, such as appliers delivering inauthentic data on purpose.
Regulating on operators application for the Licence
In legal, everyone who wants to operate a financial market could apply for licences. However, in the checking process, the licencing regime can also regulate appliers with some entering requirements. Appliers should provide information and documents which meets the needs of connective legislations, showing that it owns the skills, expertise and capacity to achieve the market’s obligations. The information and documents should provide sufficient descriptions to the Minister with a comprehensive idea based on the features of the markets. Simple application will be deal within 12 weeks, and more complex applications will take up with 16 weeks. The waiting time will not be counted if ASIC requires more information. Therefore, the operator of financial market in Australia should consider and comply with Corporations Act, Operating rules and procedures and Financial Services Reform Act.
Compensation regimes and Misconduct provisions for financial markets
A licensed financial market where participants provide services for retail clients should approve compensation arrangements (Macmillan, 2003). The compensation regime avoids retail clients from suffering huge losses in some specific circumstances. A licensee should ensure compensation arrangements with respect to its market. If the licensee does not own adequate compensation arrangements, the approval of arrangements will be revoked according to s882C. Corporation Act also claims that a market licensee is responsible for paying compensation. In addition, the regime also contains a number of market misconduct provisions relating to financial products and services, such as market manipulation, false trading and market rigging, price manipulation, inducing persons to deal and to disseminate illegal transactions information. All these misconduct provisions, under the single regulatory framework, prohibit many illegal financial operating and ensure the fairness of financial markets.
The underlying philosophy of this regime
In general, the most significant underlying philosophy of Australia government is regulating financial operators with a single uniform regulatory framework. This regime governs the operators by a single principle to licence them who satisfy the requirements. As Falkena and Bamber (2001) illustrated, the general philosophy of financial regulation of any country is shaped by the conventions of the financial community and ideologies supported by the political authorities. The licensees have a number of obligations so that they will operate under the Minister’s and ASIC’s regulating. It is considerable that participants in financial market will behave different with those in other markets. Therefore, in order to meet the market needs, the regulation should be both effective and efficient in financial market, that is the reason why this regime is also very flexible. However, although there are many changes in financial regulation policies, the basic principles remain the same that is fostering enterprise and protecting investors and consumers (Ferran & Goodhart, 2001).
There are two basis activities in the regulation process, which are the provision of guidance and the constraints imposition. The aim of regulation is to redress monopoly powers and to compensate for spill-over costs. The operators have to prepare adequate compensation arrangements otherwise their licences will be revoked. This regime relies more on legislative constrains other than self-correcting of markets (Delimatsis, 2011). As well, regulation in financial market plays an important role of consumer protecting. The Minster and the ASIC devise a lot of guidelines and operational constraints for the sake of ensuring the fairness to consumers (Burnett & Bath, 2002). The philosophy of financial markets regulation is that the regulators and the regulated parties both anticipate creating and maintaining an effective and efficient system of regulation (Long & Vittas, 1991).
Burnett, R. & Bath, V. (2002). Law of international business in Australasia. Sydney: The Federation Press.
Delimatsis (2011). Financial regulation at the crossroads: implications for supervision. Netherlands: Kluwer Law International.
Falkena, H. & Bamber, R. (2001). Financial Regulation in South Africa. Available at: http://www2.resbank.co.za/internet/Publication.nsf/LADV/E8D79424F5A87CA542256B52005CA2B3/$File/fregch1.pdf. Assessed on: 2011/10/3
Ferran, E. & Goodhart, C. (2001) Regulating financial services and markets in the twenty first century. Oregon: Hart Publishing
Johnston, I. (2002). Licensing for Financial Service Intermediaries. Available at: http://www.asic.gov.au/asic/pdflib.nsf/lookupbyfilename/ibna12-9-02.pdf/$file/ibna12-9-02.pdf. Assessed on: 2011/10/1
Long, M. & Vittas, D. (1991). Financial regulation: changing the rules of the game. Washington: Policy Research Dissemination Center
Macmillan, F. (2003). International corporate law. Oregon: Hart Publishing.
Plessis, J. & Bagaric, M. & Hargovan, A. (2011). Principles of contemporary corporate governance. Cambridge: Cambridge University Press
Williams, O. (2009) Financial Regulation: A framework for crafting and assessing proposals to Modernize the outdated U.S. financial regulatory system. Washington: United states Government Accountability Office.